Star power transcends broader weakness

Emerging biotech
Starpharma Holdings
defied the broad-based market weakness as the S&P/ASX Small Ordinaries Index gave up over 1 per cent on Monday.

Starpharma shares surged to a record high on positive clinical results for its VivaGel product to treat bacterial vaginosis (BV).

The phase 2 study showed that treatment using VivaGel once daily over seven days resulted in 74 per cent of patients achieving clinical cure of BV compared with just 22 per cent in the placebo group.

What is more exciting is that VivaGel seems to provide a lasting cure for BV in a significant proportion of women using Starpharma’s gel.

Cases of BV are fairly common and the condition has a tendency to recur. The company estimates that the market stands at more than $1 billion due to the long-term usage associated with the product.

This is a significant opportunity for a biotech with a market capitalisation of a little over $300 million and the test result will support a new patent filing for VivaGel that could protect the product until at least 2032.

VivaGel has been proven effective in combating the spread of sexually transmitted diseases and Starpharma has struck a licensing deal with the world’s largest condom maker, Reckitt Benckiser, to coat condoms with VivaGel.

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The deal excludes Japan – allowing Starpharma to secure a similar licensing deal for that country with Okamoto Industries earlier this month.

Starpharma enjoyed its best one-day gain in nearly two months of 7.4 per cent to $1.46 in morning trade, but Shaw Stockbroking doesn’t believe it is too late to jump in as it has a 12-month price target of $2.10.

ERM Power (EPW)

Electricity generator and retailer
ERM Power
also lit up the leader board this morning after it signed a material sales contract with the Australian government.

The deal is estimated to be worth more than $300 million over four years. ERM will provide power to 82 government departments and agencies in the Australian Capital Territory and NSW.

This is a significant development as it will help to “de-risk" the stock by broadening its client base and geographical markets. ERM had been under pressure since the Queensland floods due to worries that customer take-up rates would be negatively affected by the disaster.

ERM currently has more than 85 per cent of its 2011-12 forecast sales locked in and is trading at an attractive one-year price-earnings multiple of 7.5 times.

While that multiple suggests value in the stock and is at a significant discount to the 22 times average of other utility companies, ERM deserves to trade at a discount to other electric utilities to reflect the gas exploration component of its business.

The stock rallied 3.1 per cent this morning to a more than two-week high of $1.65 in early Monday trading.